The Cleantech LP Conundrum

Cleantech limited partners have a big conundrum. It’s called unrealized gains.

After years of struggling, cleantech investors are now quietly but optimistically beginning to talk about impressive gains in their funds. Unfortunately, the elephant behind them that LPs are beginning to talk about is the prevalence of massive unrealized gains from the behemoth solar, biofuels and automotive startups in the portfolios.

The question is simple, and much debated. Are the unrealized gains real, or unreal?

The naysayer argument runs something like this:

  • Many of the companies are pre-revenue, certainly pre-profit, and tons of them are scary early stage when it comes to actually proving the technology OR the business at scale.
  • There’s still not much in the way of IPO market or M&A market backing up the levels of these valuations (one vicious example is the massive downround valuation smash A123 took in its last round, once you dig into the the prospectus).
  • The energy business doesn’t tend to pay huge tech multiples for exits, and even business successes may get crushed (think Aventine and Verasun at the end of the day).
  • The amount of capital many of the key companies in the portfolios will still need, and the limited GP funds raised in the last couple of quarters, may put a lot of downward pressure on price for the more capital intensive deals.
  • There is a sneaking suspicion among some LPs that if you looked at it from a concentration risk perspective, a quite small web of large deals has been bid up among venture capitalists, causing a bit of a valuation bubble in the portfolios.

The cleantech is finally coming into its own argument, runs like this:

  • The combo of policies around the world is now a heavyweight, from Stimulus to FIT to Climate Change to PTC et al, and those dollars are starting to tell.
  • The consumer and business shift to things green, and the rebounce in oil prices (though not gas or electricity) is underpinning the future growth to justify the valuations.
  • The valuations are based off of big successes like First Solar’s IPO, and are legitimately derived.
  • Some of the early big deals in key areas like thin film solar and automotive are finally beginning to deliver production, and will walk the walk, deserving the kinds of multiples that First Solar got, and underpinning valuations in an IPO market.
  • GPs are increasingly raising later stage funds, and that money has got to go somewhere.

Which argument you buy on the subject may frankly make or break you as an investor. If you believe the naysayers, and a couple of these deals realize out and make half a dozen or a dozen funds, you may be on the short end of the fundraising / returns bragging rights stick for years. If they don’t come through, anyone not in the “Big Bad Bets” (taking that “Bad” either as a pejorative or as BadA**, depending on your perspective), may look like a braniac. And regardless, if some of these big returns do realize, LPs will have plenty to debate about the “quality” of those earnings. Were they good, or just lucky? And how do you tell?

Neal Dikeman is a partner at Jane Capital Partners, and has cofounded, run, invested in, or served as a director of multiple startups in cleantech and technology, and has advised a number of large energy companies on venture investing. He is Chairman of Carbonflow and, and a Texas Aggie.

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